The Bank of England cut rates by 150bp, the SNB by 50bp and the ECB by 50bp. The dramatic moves by the central banks shows that the depth of the economic problems in the global economy and the implications of economic contraction on the inflation outlook is now being recognised fully by policymakers.

On the data front in the US, initial jobless claims for the week ending Nov 1 declined -4k to 481k, and was worse than market expectations.

The attention of the financial markets in the US is still on the Obama victory as the market waits for him to announce who he will appoint as Treasury Secretary. The media is focussing on three possibilities - current NY Fed Gov Tim Geithner, former Fed chairman Paul Volcker and former treasury secretary Lawrence Summers. Of these, Geithner seems the most likely candidate to us. At any rate, Obama will be meeting with his 17-member transition economic team on Friday but it is not clear whether he will take the opportunity to announce his treasury secretary.

The broader dollar outlook remains unchanged. The US dollar has been benefiting primarily from risk aversion flows into liquid and safe US securities as redemptions from hedge funds and asset managers and margin calls for wealthy private investors continue. The US dollar can also look to benefit from expanded inflows into its expanding Treasury market and also on the back of improving yield differentials as inflation-targeting central banks such as the ECB and the BoE have greater scope to cut interest rates. As always, question marks over long-term valuations for the dollar remain given the US remains ground zero of the international crisis and given the potential for foreign reserve managers to accelerate diversification out of the dollar. I am bullish on the USD, however short term risk is any materially negative data that could push it lower to the EUR/USD 1.30 handle, offering an opportunity to sell. The USD rally can continue into mid/late 2009 moving below 1.10 EUR/USD.

Ahead today, non-farm payrolls for October at 1330 GMT are the main event. We expect a decline of -250k vs market expectations of -200k.


The ECB cut rates by 50bp yesterday as was expected. While the ECB was hawkish at its press conference, there were only modest hints of further rate cuts. However, we think that there will undoubtedly be further rate cuts to come and the domestic economy continues to deteriorate and short-term inflation risks are evaporating. However, we think the next rate cut won't eventuate until January.


The Bank of England cut interest rates by 150bp yesterday in a surprisingly aggressive move. In their accompanying statement the MPC said that they see a substantial risk of undershooting the 2% inflation target and that global banks are facing the worst disruption in almost a century. With rates now the lowest in over 50 years, we believe the Bank of England have sent a clear message to markets that economic conditions are deteriorating sharply in the UK, especially as consumer spending falls and credit constraints continue to hurt the economy. Despite repeated cuts earlier the housing market has clearly not managed to pick up, largely due to the sharp drop in mortgage approvals and availability, and we do not believe the bottom has been reached in this sector. The pound originally fell on the back of the decision but has managed to recoup most of the losses, as such an aggressive step is generally desired in the present environment. We expect a more detailed analysis of the present situation, along with the BoE's upcoming intentions will be released with next week's inflation report.

Ref: UBS

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Tags: BOE